Unit: Advanced Management Accounting
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Login to Access| Cost per unit | |||
| Product | Tablet | Laptop | Desktop |
| Direct material | 3,600 | 7,500 | 4,200 |
| Labour: Skilled | 1,800 | 2,700 | 900 |
| Labour: Unskilled | 600 | 1,200 | 3,000 |
| Variable overhead costs | 900 | 2,100 | 2,100 |
| 1. | All grades of labour and direct material costs are variable costs. |
| 2. | Product “Tablet” is sold in regulated market and the regulators have set a price of Sh.9,000 per unit. |
| 3. | Product “Laptop” has a contribution to sales ratio of 25%. |
| 4. | The total fixed costs of Davetec Ltd. are Sh.86.4 million and the management has set a target net profit of Sh.3 million next year. |
| 5. | The budgeted sales demand for next year are as follows: | |||
| Product | Tablet | Laptop | Desktop | |
| Budgeted demand units | 11,000 | 6,000 | 13,100 | |
| Sh. | |
| Materials | 25 |
| Direct labour (30 minutes) | 30 |
| Manufacturing overheads | 20 |
| Total cost | 75 |
| Component | U Sh. | S Sh. | B Sh. |
| External market price per unit | 2,400 | 2,300 | 2,000 |
| Unit variable production cost in motherboard division | 1,650 | 1,200 | 1,400 |
| Fixed production cost per unit | 3,500 | 2,800 | 1,900 |
| Labour hours required per unit in motherboard division | 3 | 4 | 2 |
| Maximum external sales demand (units) | 8,000 | 5,000 | 3,000 |
| Division | Beta division Sh. | Optima division Sh. |
| Market price per “token metre” | 1,500 | |
| Transfer price per token metre to Optima division | 900 | |
| Market price per gas cylinder | 6,500 | |
| Variable costs per gas cylinder | 2,500 | |
| Direct labour cost per labour hour | 150 | |
| Direct material cost per token metre | 250 | |
| Variable overheads per labour hour | 100 | - |
| Fixed cost per annum | 150,000,000 | 392,000,000 |
| 1. | The variable cost for a gas cylinder excludes the cost of the “token metre”. |
| 2. | The first unit of a token metre will take 20 labour hours to produce. However, it is known that the work of direct labour is subject to an 85% learning curve rate. This will apply to all 260,000 “token meter” production capacity. |
| 3. | Optima division will continue to outsource 40,000 token metres from an external supplier at a price of Sh.1,600 to eliminate the deficiency from internal transfer. |
| 4. | Optima division has a target profit of Sh.180 million. |
| 5. | The forecast external sales and production capacity level for the division are as follows: |
| 5. | External sales | Production capacity | |
| Beta division | 100,000 token metres | 260,000 token metres | |
| Optima division | 200,000 cylinders | 300,000 cylinders |
| Product | ||||
| A | B | C | D | |
| Market price per unit (Sh.) | 150 | 146 | 140 | 130 |
| Variable cost of production per unit (Sh.) | 130 | 100 | 90 | 85 |
| Labour hours required per unit | 3 | 4 | 2 | 3 |
| 1. | Product D can be transferred to Division Y, but the maximum quantity that may be required for transfer is 2,500 units only. |
| 2. | The maximum sales in the external market are as follows: |
| 2. | Units | |
| A | 2,800 | |
| B | 2,500 | |
| C | 2,300 | |
| D | 1,600 |
| 3. | Division Y can purchase the same product at a price of Sh.125 per unit from external suppliers instead of receiving transfer of product D from Division X. |
| Annual fixed expenses: | Sh. |
| Staff salaries (excluding room attendants) | 7,500,000 |
| Repairs and maintenance | 2,600,000 |
| Depreciation on buildings and furniture | 2,400,000 |
| Other fixed expenses like dusting and sweeping | 3,250,000 |
| Total | 15,750,000 |
Variable expenses (per guest per day): | Sh. |
| Linen and laundry | 300 |
| Electricity and other facilities | 200 |
| Miscellaneous expenses | 250 |
| The management wishes to realise a profit of 25% on total cost. | |
| Assume a 30 day month in all cases. | |
| Quantity sold (units) | Selling price (Sh.) |
| 1 | 150 |
| 2 | 140 |
| 3 | 130 |
| 4 | 120 |
| 5 | 110 |
| 6 | 100 |
| Division | ||
| X Sh. | Y Sh. | |
| Variable cost per unit | 13 | 7 |
| Fixed costs attributable to the product | 50,000 | 70,000 |
| Sh."000" | Sh."000" | Sh."000" | |
| Sales revenue (100,000 jumpers at Sh.1.000 per jumper) | 100,000 | ||
| Factory cost of goods sold: | |||
| Direct materials | 10,000 | ||
| Direct labour | 35,000 | ||
| Variable factory overheads | 6,000 | ||
| Fixed factory overheads | 22,000 | 73,000 | |
| Administrative overheads | 14,000 | ||
| Selling and distribution overheads: | |||
| Sales commission (2% of sales) | 2,000 | ||
| Delivery costs: | |||
| Variable | 5,000 | ||
| Fixed | 4,000 | 11,000 | (98,000) |
| Profit | 2,000 |
| Year 1 | Year 2 | Year 3 | |
| Units manufactured and sold | - | 100,000 | 200,000 |
| Sh. | Sh. | Sh. | |
| Research and development costs | 160,000,000 | ||
| Products design costs | 800,000,000 | ||
| Marketing costs | 1,200,000,000 | 1,000,000,000 | 1,750,000,000 |
| Manufacturing costs: | |||
| - | 40,000 | 42,000 |
| - | 650,000,000 | 1,290,000,000 |
| Distribution costs: | |||
| - | 4,000 | 4,500 |
| - | 120,000,000 | 120,000,000 |
| Selling costs: | |||
| - | 3,000 | 3,200 |
| - | 180,000,000 | 180,000,000 |
| 200,000,000 | 900,000,000 | 1,500,000,000 |
| Division A | Sh. |
| Current selling price for each oven | 450 |
| Costs per oven: | |
| 75 |
| 200 |
| 45 |
| Annual fixed overheads | 7,440,000 |
| Annual production and sales of ovens (units) | 80,000 |
| Maximum annual market demand for ovens (units) | 80,000 |
Division B | Sh. |
| Current external selling price per set of fittings | 80 |
| Current price for sales to Division A | 75 |
| Costs per set of fittings: | |
| 5 |
| 15 |
| Annual fixed overheads | 4,400,000 |
| Units | |
| Maximum annual production and sale of sets of fittings (including internal and external sales) | 200,000 |
| Maximum annual external demand for sets of fittings | 180,000 |
| Maximum annual internal demand for sets of fittings | 80,000 |
| (a) | Under the current transfer pricing system, prepare aprofit statement showing the profit for each of the divisions and for Kitchen Masters Ltd. as a whole. Your sales and cost figures should be split into external sales and inter-divisional transfers, where appropriate. |
| (b) | Head office is considering changing the transfer pricing policy to ensure maximisation of company's profits without demotivating either of the divisional managers. Division A will be given autonomy to buy from external suppliers and Division B to supply external customers in priority to supplying Division A. Evaluate the maximum profit that could be earned by Kitchen Masters Ltd. if transfer pricing is optimised. |
| (c) | Discuss the issues of encouraging divisional managers to take decisions in the interest of the company as a whole, where transfer pricing is used. Provide a reasoned recommendation of a policy that Kitchen Masters Ltd. should adopt. |
| ...................................................................... | Note | Sh."000" |
| Direct materials: | ||
| 100,000 welding rods at Sh.10 per rod | 1 | 1,000 |
| 300,000 welding rods at Sh.12 per rod | 3,600 | |
| Other materials | 2 | 2,000 |
| Labour cost: | ||
| Skilled: 30,000 hours at Sh.30 per hour | 3 | 900 |
| Unskilled: 20,000 hours at Sh.15 per hour | 4 | 300 |
| Depreciation: General purpose machines | 5 | 100 |
| Specific purpose machines | 6 | 200 |
| Total cost | 8,100 | |
| Profit | 810 | |
| Suggested price | 8,910 |
| 1 | The repair contract requires 400,000 welding rods of which 100,000 rods are already in inventory. These types of rods are about to be phased out of the market and hence if they are not used, they will have to be discarded. If ABC Ltd. is awarded the contract, it will have to purchase an extra 300,000 welding rods of the new model at a cost of Sh. 12 per rod. |
| 2 | Other materials will have to be bought at the above price if the contract is to be undertaken. |
| 3 | Skilled workers will have to be hired at the cost provided. |
| 4 | ABC Ltd. has five unskilled workers who are currently idle. The cost shown above is the guaranteed salary payable to the five workers. |
| 5 | The depreciation given is for the general purpose machines which are normally used to do other jobs including the special one if allocated. |
| 6 | The depreciation given is for machines which will be bought specifically for this contract. After the contract is complete, the machines will be scrapped without any alternative use. |
| 7 | ABC Ltd. aims to earn a profit mark up of 10% on cost on all work undertaken. |
| Details | 1 January 2018 | 31 December 2018 | 31 December 2019 | 31 December 2020 |
| Research and development cost (Sh.) | 850,400 | 200,000 | ||
| Production cost: | ||||
| Variable cost per unit (Sh.) | - | 100 | 80 | 90 |
| Total fixed cost (Sh.) | - | 500,000 | 500,000 | 500,000 |
| Marketing cost: | ||||
| Variable cost per unit (Sh.) | - | 12 | 8 | 10 |
| Total fixed cost (Sh.) | - | 200,000 | 150,000 | 100,000 |
| Distribution cost: | ||||
| Total fixed cost (Sh.) | - | 120,000 | 120,000 | 120,000 |
| Disposal of special equipment (Sh.) | - | - | - | 300,000 |
| Present value factor | 1 | 0.89 | 0.8 | 071 |
| Production (units) | - | 20,000 | 20,000 | 20,000 |
| Total Sh."000" | Per unit Sh. | |
| Sales | 13,600 | 1,700 |
| Cost of goods sold | (8,400) | (1,050) |
| Gross margin | 5,200 | 650 |
| Selling and administrative expenses | (3,900) | (487.5) |
| Divisional net income | 1,300 | 162.5 |
| Sh. | |
| Direct materials | 380 |
| Direct labour | 270 |
| Manufacturing overheads (75% fixed) | 400 |
| Total cost per tube | 1,050 |
| Sh. | |
| Direet materials | 600 |
| Direct labour | 490 |
| Manufacturing overheads (2/3 fixed) | 540 |
| Total cost per tube | 1,630 |
| (i) | Advise on the lowest acceptable transfer price from the perspective of the Tube division for each of the new high resolution tubes. |
| (ii) | Assume that the T'V division has identified an external supplier that could provide the high resolution tubes for only Sh.2,000 each, and the Tube division is willing to pay this price. Evaluate the effect of this decision on the profits of the company as a whole. |
| Selling price per unit Sh.300 | Selling price per unit Sh.350 | ||
| Probability | Sales volumes (units) | Probability | Sales volumes (units) |
| 0.4 0.5 0.1 | 120,000 110,000 140,000 | 0.3 0.3 0.4 | 108,000 100,000 94,000 |
| 1 | The variable production cost would be Sh.120 per unit for production volumes up to and including 100,000 units each year. However, if production exceeds 100,000 units each year, the variable production cost per unit would fall to Sh.110 for all units produced. |
| 2 | Advertising costs would be Sh.9,000,000 per annum at a selling price of Sh.300 and Sh.9,700,000 per annum at a selling price of Sh.350. |
| 3 | Fixed production costs would be Sh.4,500,000 per annum. |
| Sh. | |
| Direct material | 12 |
| Direct labour | 6 |
| Direct expenses | 6 |
| Variable manufacturing overheads | 6 |
| Fixed manufacturing overheads | 12 |
| Selling and packaging expense (variable) | 2 |
| 44 |
| 1 | Annually, 10,000 units of product "RR" are sold externally at the standard price of Sh.90 per unit while 5,000 units are transferred to division B at an internal transfer charge of Sh.87 per unit. |
| 2 | The selling and packaging expense is not incurred for internal transfers. |
| 3 | The unit costs of product "TT" are as follows: |
| Sh. | ||
| Transferred-in item ("RR") | 87 | |
| Added direct materials | 69 | |
| Direct labour | 9 | |
| Variable overheads | 36 | |
| Fixed overheads | 36 | |
| Selling and packaging expense (variable) | 3 | |
| 240 |
| 4 | A recent study of the demand and sales relationship of the company's products by the sales division produced the following results: |
| Division A | |||||
| Selling price (Sh.) | 60 | 90 | 120 | ||
| Demand (units) | 15,000 | 10,000 | 5,000 | ||
Division B | |||||
| Selling price (Sh.) | 240 | 270 | 300 | ||
| Demand (units) | 7,200 | 5,000 | 2,800 |
| 5 | The manager of division B has proposed that transfers from division A should be made at Sh.36 per unit which represents the variable costs plus a minimum mark-up. |
| Division X | |
| The electrical component will be produced in batches of 1,000 units. The maximum capacity is 6,000 components per month. |
| Sh.15 per component. |
| Sh.50,000 (these are incurred specifically to manufacture the electrical component). |
| Division Y | |
| Product "Yetu" will be produced in batches of 1,000 units. The maximum customer demand is 6,000 units of product "Yetu" per month. |
| Sh.9 per unit plus the cost of electrical component. |
| Sh.75,000 (these are incurred specifically to manufacture product "Yetu"). |
| Demand (units) | Selling price per unit (Sh.) |
| 1,000 2,000 3,000 4,000 5,000 6,000 | 120 110 100 90 80 67 |
| (a) | Based on a transfer price of Sh.45 per electrical component, advise the management of Sang Ltd. on the monthly profit that would be earned as a result of selling product "Yetu". | |
| (b) | Determine the maximum monthly profit from the sale of product "Yetu" for Sang Ltd. | |
| (c) | Using the marginal cost of electrical component as a transfer price, advise the management of Sang Ltd. on the monthly profit that would be earned as a result of selling product "Yetu" by divisions X and Y and the company as a whole. | |
| (d) | (i) | Using the above scenario, discuss the problem of setting a transfer price. |
| (ii) | Suggest a transfer pricing policy that would help Sang Ltd. to overcome the transfer pricing problems that it faces. |
| 1 | Hotel data: | |
| Total number of rooms | 2,400 | |
| Rooms mix: | ||
| Double rooms | 75% | |
| Single rooms | 15% | |
| Family rooms | 10% | |
| Fees per room per night (Sh.): | ||
| Double rooms | 4,000 | |
| Single rooms | 3,000 | |
| Family rooms | 6,000 | |
| Number of guests per room: | ||
| Double rooms | 2 | |
| Single rooms | 1 | |
| Family rooms | 4 | |
| Note: When occupied, all rooms will contain the number of guests as above. | |
| Costs: | |
| Variable cost per guest per night Sh.1,000 | |
| Attributable fixed costs for the five-day period: | |
| Double rooms Sh.5,160,000 | |
| Single and family rooms (total) Sh.3,000,000 | |
| 2. | Accommodation for guests is provided on an all-inclusive basis (meals. drinks and entertainment). |
| 3. | The hotel management expects all single and family rooms to be "sold out" for each of the five nights of the tournament. However, they are unsure whether the fee in respect of double rooms should be increased or decreased. At a price of Sh.4,000 per room per night they expect an occupancy rate of 80% of available double rooms. For each Sh. 100 increase/decrease, they expect the number of rooms to decrease/increase respectively by 40. |
| 4. | The objective of the hotel management is to maximise profit. |
Required | ||
| (a). | (i) | The fees that shouid be charged per double room per night in order to maximise profits during the tournament. |
| (ii) | The profit that wouid be earned from staging the tournament as a consequence of charging the fee determined in (a)(i) above. | |
| (b). | The management of the hotel is concerned about the level of variable costs per guest per night to be incurred in respect of the tournament. A recent review of proposed operational activities has concluded that variable cost per guest per night in all rooms in the hotel would be reduced by 20% if proposed changes in operational activities were made. However, this would result in additional attributable fixed costs amounting to Sh.2,000,000 in respect of the five-day period. Required: Advise the management whether, on purely financial grounds, they should make the proposed changes in operationai activities. |
| (c). | Discuss two initiatives that the management might consider in order to further improve the profit from staging the cricket tournament. |